Saturday, 16 May 2009

Beware of the Sage

"'If we elected a Congress with intestinal fortitude, it would stop the spending all right!' ... I went to Washington with exactly that hope and belief. But I have had to discard it as unrealistic. Why? Because an economy Congressman under our printing press money system is in the position of a fireman running into a burning building with a hose that is not connected with the water plug. His courage may be commendable, but he is not hooked up right at the other end of the line. So it is now with a Congressman working for economy. There is no sustained hookup with the taxpayers to give him strength."
Howard Buffett, U.S. Congressman 1948

Businessman and Politician Howard Buffett was the father to one of the world's most successful investors in history, Warren Buffett, who would grow up to be the richest man on the planet by earning his wealth purely by investing in companies. From an early age Warren was exposed to the business that would become his passion. Howard worked as a local stock broker which captured the younger Warrens imagination. While other children were playing games, Warren was more interested in business activities, so much so that he would never have attended University had it not been for his fathers influence. He began as an Investment salesman, but as time went by the "Sage of Obamha" amassed billions and become a household name.

However, since the credit crunch began brand Buffett has taken a hit of late. He has lost some of his wealth during the financial turbulence and Bill Gates has resumed pole position as the richest person in the world. His Investment fund, Berkshire Hathway, has made its first loss since 2001 and in the process lost its triple A rating. Despite setbacks, Warren continues to reassure his legions of followers that over the long term all is well and stocks will always do well. It would take a brave person to write off the Sage, but there are signs that Warren is out of step with the times.

There seems to be a contradiction between his advice and his actions. He is famed for calling financial derivatives as "weapons of mass destruction" but recently bought up a pile of such instruments to hold in his investment company. He states that governments are carrying out the correct policies to help the economy through the current crisis, yet openly admits that government bonds are a bubble. Through 2006 and 2007 he warned that many stocks were overvalued along with various other issues that the world would face, yet bought many stocks, including Conoco Phillips, at their peak. The above seems to illustrate a person in touch with global affairs, yet going against his own advice. At the age of 78 has Warren embarked on a personal crusade to save the U.S. and world economy from further collapse, carrying forth his philanthropist work into his investment decisions?

His father was a strong believer in Libertarianism, with a strong distrust of Government. To Howard, Government was always the root of the problem - not the solution. The policies and deficits being proposed today would deeply worry Howard who never lived to see the world monetary system we operate under today. Under a pure fiat system Howard would have quite different investment decisions to his son, as he was always weary of how governments could confiscate the public's wealth through inflation. Gold was his preferred monetary basis and he would no doubt be telling his son about its properties during the times we find ourselves in now. Warren by contrast, views Gold in a somewhat different light, a barbarous relic, which does no good for society unlike stocks. He is no doubt correct on the fact of what both assets do for society, but is he willing to put his own and his clients wealth at risk for the good of humanity?

Warren can afford to be careless. He has an inexpensive lifestyle and has no interest in money, it seems he just relishes the challenge of picking stocks. He has built an almost religious following, but beware, all people are fallible. Throughout history great captains of finance have lost their way. The Rothschilds, Rockefellers and Morgans to name a few. All bounced back, but lost considerable influence and dominance that they once had. Could we be seeing a similar point in history with Warren Buffett? I have no doubt that he has an eye for picking stocks and certainly knows his domain, but what if there are no fundamentals for the asset class in question? When government embarks on a policy of preventing liquidation and printing money by increasing government spending, this does not create the conditions required for a strong equity market. Japan tried this and their market index is still under half its measure from 20 years ago. During the seventies the US stocks went no where for 15 years, in inflation adjusted terms you would have lost money.

Despite Warren seeing inflation down the road, he seems to quietly ignore this damaging effect on business behaviour, choosing to believe in the fact that Coca Cola or whoever will be able to rise above it. Howard would see something different in the climate we are in. He would see the government in the process of hampering the private sectors ability to function along with the government confiscating the public's wealth through inflationist policies. He would also worry about the current monetary system we find ourselves in. He never lived to see a full global fiat system, but he understood the history of it. As he once said;

"But first let me clear away a bit of underbrush. I will not take time to review the history of paper money experiments. So far as I can discover, paper money systems have always wound up with collapse and economic chaos."

Could we be facing further dislocations to come, or are we through the worst as many are suggesting? We have not even begun in this recession even as many proclaim that a recovery is within sight, as the clutching at straws begins. There is much more chaos to come and we are due a currency crisis. The dollar is a bubble along with other currencies. The Yen trade still has huge amounts of money overseas and as further losses accumulate, these will no doubt have to be covered putting further downward pressures on already weak currencies. Whether we see the end to the current monetary system or a transition to an alternative is another question. The authorities can only buy time, they can't fix the system and as the quotes sixty years ago suggest, paper money can never survive indefinitely. As for the question on whose view to take, Howard or Warren, Howard clearly understood economic theory and history better than his son. Investors beware, Warren may have a generous heart in attempting to save the world but many of his followers will not have as deep pockets.


  1. Warren Buffett has been repeatedly ridiculed for losing touch with reality. The last time I remember this happening was during the tech stock market bubble which burst in 2000/2001. The explanation given in the media for Buffett's abstinence from tech stocks at that time was "he is to too old in order to correctly identify the great potential of tech stocks".

    The tech stock mania is now largely forgotten, but the reputation of Buffett has only grown since that time.

  2. Many were pointing out that the stock market was a bubble during the late nineties, not just Buffett (it wasn’t hard – many companies were trading for millions, yet had no earnings). However these people who were with him on that call are not too bullish on the stock market for the long term. Indeed if Buffett was so wise during the stock market bubble why did his company still post a loss during the time of the crash while others had hedged themselves appropriately? I’m not discounting that Buffett is very good at what he does, but he may need to take some of his own advice, rather than his beliefs. The stock market is not the only asset class out there and he has been contradicting himself of late. I’m sure he will be able to beat the averages, but what if the averages he is investing in over the long term are poor?